Federal Reserve’s Powell defends ‘gradual’ hikes
Federal Reserve Chairman Jerome Powell on Friday defended the central bank’s strategy of only gradually raising interest rates, saying the historically low unemployment rate isn’t pushing up inflation as rapidly as expected.
Powell said blindly following simple economic rules – such as very low unemployment will lead to faster wage and price increases the Fed should head off with higher rates – often doesn’t work. And so the Fed needs to be more nimble.
“While inflation has recently moved up near 2 percent, we have seen no clear sign of acceleration above 2 percent, and there does not seem to be an elevated risk of overheating,” Powell said in remarks he planned to deliver Friday at the Fed’s annual symposium in Jackson Hole, Wyoming.
The Fed has raised rates by a quarter percentage point twice this year – seven times since late 2015 – from near zero to a range of 13⁄4 percent to 2 percent. Some economists believe the Fed should be lifting rates more rapidly to head off a spike in inflation that isn’t yet evident.
That’s because the 4 percent unemployment rate is below the 4.5 percent that Fed policymakers consider the “natural” or long-run jobless rate. Unemployment below the natural rate theoretically should mean there are fewer available workers, prompting employers to raise wages faster, which should trigger faster price increases.
Part of the reason wages and prices haven’t climbed more briskly is that consumer and businesses expect inflation to remain low and believe the Fed will raise rates to tamp down inflation if it were to pick up, Powell said. In other words, workers don’t expect wages and prices to accelerate, and so they aren’t demanding big raises. Employers, in turn, aren’t giving them.
To prove his point that economic rules are often off the mark, Powell cited the “Great Inflation” of the 1960s through the 1980s and the “Great Moderation“of the 1990s. In the 1960s, unemployment was above the natural rate that Fed officials identified and so they believed inflation wasn’t a risk. Instead, they were determined to push unemployment lower to help workers.
But workers and employers weren’t as confident in stable inflation as they are today. And so an upward spiral of wages and prices got out of control.
In the 1990s, the low unemployment rate called for faster rate hikes to head off inflation. But then-Chairman Alan Greenspan realized that advances in software and computers, the so-called New Economy, were increasing efficiency and keeping a lid on inflation, reducing the need to hike rates.
“One general finding is that no single, simple approach to monetary policy is likely to be appropriate across a broad range of plausible scenarios,” Powell said.